Built to scale A comparative case analysis, assessing how social enterprises scale Jennifer M. Walske and Laura D. Tyson
Abstract: A persistent, nagging question among social entrepreneurs and those who research social entrepreneurs is why some social enterprises scale while others do not. Of late, much credit has been given to design innovation, design thinking, fast pivots and the Business Model Canvas. But what if we are placing too much emphasis on design innovation and pivoting, and missing other key important factors that help social enterprises scale quickly? While innovation is clearly important, and arguably a necessary baseline, the authors’ interviews with successful social entrepreneurs have pointed more to the importance of sourcing financial capital, building out their supply chain – both in production and distribution – and obtaining early media recognition. These three factors created a virtuous cycle, allowing these firms to increase their revenues, employees and impact substantially each year during their first four years after founding. Keywords: social enterprise; social entrepreneurship; scaling; supply chain; media recognition Jennifer M. Walske (corresponding author) is a Social Impact Fellow at the Haas School of Business, UC Berkeley, CA, USA, and both a Program Director for Conscious Leadership and Social Innovation and an Assistant Professor in the School of Management, University of San Francisco, 101 Howard Street, San Francisco, CA 94118, USA. E-mail:
[email protected]. Laura D. Tyson is Professor of Business Administration and Economics, and Director of the Institute for Business and Social Impact, Haas School of Business, UC Berkeley, CA, USA.
Recently, the topic of scaling has garnered great importance in the field of social entrepreneurship. This is due to the fact that while more social enterprises are being founded (Tracey et al, 2007), fewer have actually scaled (Casasnovas and Bruno, 2013). In this research, we refer to Bloom and Chatterji’s (2009, p 114) definition of social entrepreneurs as ‘individuals who startup and lead new organizations or programs that are dedicated to mitigating or eliminating a social problem, deploying change strategies that differ from those that have been used to address the problem in the past’. In keeping with this special issue, Bloom and Chatterji (2009) also
emphasize that scaling is one of the foremost challenges for social entrepreneurs. It is important to keep in mind, though, that scaling is a challenge for many types of organizations. Historically, mission-oriented non-profits based in the USA have had difficulty breaking the one million dollar revenue barrier, with only 8% holding an operating budget of one million or more (Bauman, 2005, p 37). This lack of scale has led to criticism of the nonprofit sector, with claims that the traditional ‘1980s’ non-profits are ‘… incapable of concentrating capital, and unable to coordinate concerted initiatives …’ causing them to become ‘…inept to respond adequately
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to the post-2008 conditions of extreme environmental uncertainty and stability’ (Jelen, 2009, p 224). Surprisingly, a lack of scalability is a fact for mainstream for-profit enterprises as well. Of the 28 million for-profit firms in the USA, only 4% have revenue above one million (Harnish, 2014). Given that most organizations do not achieve scale, one could ask, why is scaling now so important for the field of social entrepreneurship? First, recent research suggests that social enterprises (SEs) that do not scale are going to be left behind, while those that do scale are going to monopolize a disproportionate amount of the available resources (Phillips, 2006). Phillips further emphasizes that within the last decade, funders of SEs, including social venture capital investors, foundations and government entities, have begun to select their investments and donations based on an SE’s ability to scale. They are, in essence, seeking more efficient ways to solve society’s ills, preferring to back SEs that can demonstrate leaner and more efficient operations. In the words of President Obama: ‘Instead of wasting taxpayer money on programs that are obsolete or ineffective, government should be seeking out creative, resultsoriented programs … and helping them replicate their efforts across America’ (Bradach, 2010). Second, as management research has shown (Nelson and Winter, 2002), scaling increases a firm’s likelihood of survival. Phillips (2006, p 223) notes, ‘Growth is important to ensuring that the enterprise moves out of the gestation period and becomes sustainable’. In other words, the field of social entrepreneurship, while still evolving, is no longer a greenfield; there are often competing solutions to social problems, even if the solutions are older and less efficient. If a pre-existing organization has greater size, reach and support, the newer social start-up might not be able to get meaningfully past the launch stage. Third, larger firms are able to derive economies of scale, therefore becoming more efficient and profitable as they grow, or for non-profits, more sustainable. Fourth, greater scale can lead to greater social impact. Bradach (2014) notes, ‘It is no longer sufficient to simply scale what works in an incremental manner’. As former US President Bill Clinton observed, ‘Nearly every problem has been solved by someone, somewhere. The frustration is that we can’t seem to replicate [those solutions] anywhere else’ (Olson, 1994, p 2). In business schools, a great deal of focus has been given of late to design innovation, design thinking, fast pivots and the Business Model Canvas. While design innovation is clearly important, our research indicates that we may be placing too much emphasis on design innovation and pivoting, causing us to miss other key factors that are crucial to helping SEs scale. As Ross
(2014, p 1) notes, ‘When it comes to addressing today’s urgent social problems, from education and public health to civil and human rights, innovation is overrated’. Ned Tozun, founder of d.light (one of the high-growth SEs that was part of our study) concurs:
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‘My experience in talking to entrepreneurs coming out of business school programs … is that there tends to be a lot of focus on the product idea. That’s just one small fraction of the real challenge and I think the implementation side, like how do you manufacture it, how do you get the cost right, how do you get the quality right, how do you distribute, how do you market. Those are the things that, at least when I was in business school, they never talked about….’ This is not to say that innovation lacks importance. In fact, product, service and/or business model innovation is essential for an SE to garner the initial attention of investors, partners and customers. However, in remote regions, highly innovative products can sometimes fail in the field if they require specialized parts and regular, ongoing service. Complex products can be harder to replicate, and cost is often an issue in the social sector. In this research, we took a step back from these currently popular ideation practices, and asked eight high-growth SEs what was most important to them in their first three years of operating, and what most influenced their ability to scale. Using inductive, qualitative research methods (Strauss and Corbin, 1998), our research points to three key factors that aided our social start-ups most in achieving their rapid growth: financial funding, their supply chain (manufacturing and distribution) and having a high profile in the media. While the need for funding has been referenced in other publications, the role of an organization’s supply chain, along with the importance of media, is new.
Published work on scaling To contextualize our findings, we reviewed the literature on scaling SEs, including practitioner-oriented journals on social entrepreneurship, such as the Stanford Social Innovation Review (SSIR), as well as articles in a myriad of academic journals. Based on the number of articles in SSIR, it is clear that scaling is an important topic for social entrepreneurs. In fact, we found well over a dozen articles addressing how organizations can and have scaled, often based on case study data. In academic publications, however, we found only a handful of peerreviewed articles, leading us to rely more heavily on books, such as Bloom’s work on scaling (Bloom, 2012) and practitioner-oriented journals, such as SSIR, in our literature review. Three topics consistently emerged
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from these sources: (1) the challenge of ensuring quality while growing rapidly, (2) constraints around the sourcing of additional capital (both human and financial), and (3) the implementation of an earned revenue strategy irrespective of the SE’s organizational structure (for example, non-profit, for-profit or hybrid). Both academic and practitioner articles expressed concern that quality should not be sacrificed over quantity as an SE expands its product/service offering (Bloom and Smith, 2010). If growth means lowering the quality of service to its key constituents, some founders considered such expansion ‘unethical’ (Philips, 2006). Even the definition of scale, as used in the previously published work, is fraught with nuances. For some, scaling is not measured in the number of customers garnered, or even the amount of revenue achieved, but rather by assessing how the organization’s impact has grown within its chosen constituency (Bloom and Chatterji, 2009). These elements can be summed in the following statement: ‘Impact is not just about serving more people and communities, but about serving them well’ (Dees et al, 2004). Adding to this complexity, impact often extends beyond direct beneficiaries to include stakeholders, noting that many norms and practices are shaped communally, therefore requiring the integration of change within the community itself (Bradach and Grindle, 2014). Researchers also noted that organizational inertia combined with low employee turnover could reduce an SE’s willingness to take risk and grow (Kickul and Lyons, 2003). This is in stark contrast to those SEs that did grow, which were often considered ‘masters of adaptation’ that ‘modified their tactics’ based on what was needed to succeed in each situation (Grant and Crutchfield, 2007). Human capital, therefore, was a frequently discussed topic; early management teams of SEs often felt challenged in hiring employees that were a cultural fit, equally committed to the SE’s mission, and had the skills necessary to take the SE to the next level. Growth can also require a more sophisticated organizational structure, requiring firms to move from a purely functional structure to a matrix-based organizational structure, aligning teams around projects, product groups, industry segments and geographical dimensions (Harnish, 2014). Additionally, SEs often have numerous volunteers within their ranks, and the recruitment, management and training of these volunteers can become ‘the lifeblood of cash-starved social organizations’ (Bloom and Chatterji, 2009, p 117). The very high bar around staffing, combined with increasing organizational complexity and a high dependence on volunteerism, is a key barrier to growth for some SEs. Another inhibitor to growth can be attributed to ‘founder’s syndrome’, in which a founder is reticent to
cede control of the firm, and even perceives the SE as an extension of himself or herself. This makes it difficult to put a leadership team in place that can help the organization scale, as most key decisions reside exclusively with the founder. As Harnish (2014) adds, decisions regarding individual roles, particularly those within the leadership team, are the most difficult to address in a scaling organization. In Grant and Crutchfield’s (2007) review of 12 high-impact non-profits, they found that while high-impact firms had charismatic leaders, they also had management teams with both depth and breadth – and typically larger boards than those SEs that did not scale. Furthermore, a lack of role models within the social sector can result in fewer advisers available to younger SEs in comparison to the traditional field of entrepreneurship. Another issue in the field of social entrepreneurship is a lack of access to financial capital. Commercial banks and other sources of capital do not necessarily understand how to invest in the social sector (Phillips, 2006). Additionally, SE leadership often lacks sophistication in the ability to articulate why they are deserving of capital. As such, SEs often receive lower valuations for their enterprises because ‘their impact goals are too intangible … their mission uncompromising, and their purpose too narrow’ (Jelen, 2009, p 231). Beyond the difficulties of obtaining invested capital, a recent shift encourages SEs to create a stream of earned revenue. This means moving beyond a historical dependency on charitable donations, resulting in SEs choosing for-profit or hybrid structures. As Michael Chu, Lecturer at Harvard Business School and cofounder of the IGNIA fund (a venture capital firm), stated, ‘… there has only been one way to create a new industry: develop an economic activity that earns aboveaverage financial returns’ (Bradach, 2014). This type of thinking asks SEs to blend more capitalistic approaches with social entrepreneurship, such that SEs are now creating new market niches (Tomas Carpi, 1997). In fact, a UK GEM study found that social enterprises created more jobs than mainstream enterprises (Harding, 2004). As a result, ‘There has been a global shift away from a social welfare to a market forces approach as the primary mechanism for the distribution of resources for social change’ (Phillips, 2006, p 221).
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Methodology and summary of findings To understand the factors that allow social enterprises to scale successfully, we assessed entrants in the Global Social Venture Competition (GSVC) over the past 15 years. The GSVC is one of the largest and most international social venture competitions in the world. While the GSVC started at Berkeley-Haas, it has grown to
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Won many business plan competitions with $10–20K prizes; $250K for the Draper Fisher Jurvetson Venture Challenge.
> 150%
Revenue
Funding strategy, early sources of funding
Units sold (> 300%)
Social impact
Average annual growth over first 5 years
d.light measured its social impact by determining the total number of units or number of solar lights sold.
For-profit
Organization type
Social impact measures/mission drivers
2007
Year founded
d.light
Low-cost babywarming incubators to underdeveloped populations.
< 50%
N/A
Hybrid
2008
Embrace
Draper Richards Won two Kaplan $300K, business plan $300K from the competitions. Rockefeller Once for-profit, Foundation, two main $250K from the investors were Kellogg Khosla Ventures Foundation. At and Capricorn 2.5 years became Investment Skoll grantee. Group.
Providing loans to entrepreneurs mainly in underdeveloped countries; social impact is the number of loans made.
> 150%
Cumulative loan volume (> 500%)
Non-profit
2006
Kiva
Table 1. Description of participating SEs.
Number of countries (< 50%)
Won Draper Fisher Jurvetson Ventures $250K. Funding from winning the GSVC, in addition to angel investors and founders’ own money.
The number of artisans and their family members they helped; measured their global reach by recording the total number of countries where they have helped since founded.
> 500%
Number of people helped (> 500%)
Hybrid
2004
WOG
Uses per day (> 50%)
Tons waste (> 150%)
Early partnership with Eleos (first investor) provided financial and operational benefits; funding from business competitions, Echoing Green fellowship and private capital.
Four quantifiable attributes: number of toilets (FLTs) launched, number of uses per day, total tons of waste removed, and number of jobs created in Africa.
> 500%
FLTs launched (> 100%)
Hybrid
2010
Sanergy
Ford Stewardship Council $100K grant; $50K for 3 years from Ashoka Fellowship; AVINA Foundation Leadership grant $250K.
The premium from the sale of a fair trade product that is returned directly to the cooperative where the product is grown, cultivated and produced.
> 150%
Premium dollars (> 500%)
Non-profit
1998
FT USA
$500K from DBL Investors; $200K from an angel investor Catamount Ventures, and Oak Investment Partners invest.
Building lifelong healthy eaters by making kid-inspired, chef-crafted food accessible to all.
> 500%
N/A
For-profit
2006
Revolution Foods
Lbs waste diverted (> 400%)
Won multiple business plan competitions. Founders invested from savings. $50K from a public benefit financial development company.
The pounds of food the company grew, and the pounds of waste avoided due to the company’s efforts.
> 400%
Lbs food grown (> 400%)
For-profit
2009
BTTR
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include 12 partner schools that manage participation from over 200 universities, with more than 500 entrants in the competition annually. We selected entrants from the GSVC that grew exponentially in their first five years, both in revenue and in social impact. Of the eight participants, some were winners and finalists in the GSVC, while others never made it past the regional competition level. Yet each entrant went on to become a notable, scalable social enterprise. The SEs included in our study are: Back to the Roots, d.light, Embrace, Kiva, Revolution Foods, Sanergy and World of Good. While not an entrant, but still a venture born from a Haas School of Business alumnus, we included Fair Trade USA (formerly Transfair USA), as the company’s formation pre-dates the inception of the GSVC. On average, these companies grew their revenue and social impact well over 300% each year in their first five years
(note: since Sanergy was founded in 2011, we used an average of its first four years of growth). See Table 1 for details of the companies. We began with a set of semi-structured interview questions that asked for factual clarification on topics such as: the year the SE was founded, revenue, employees and social impact, in years one through five. We also asked about the SE’s source of funding and the amount of funds raised in the first five years. We then asked more qualitative questions, focusing on how their products, customers and distribution channels had developed during the same period of time. We inquired about the role of service and/or product innovation in the start-up’s success. We also asked whether national or local governments had served as partners to the SEs by providing funding or other types of aid. Finally, we wanted to understand the importance of brand
We are conducting research on the topic of scaling the social enterprise. We are therefore comparing several factors such as government regulation, distribution channels, product innovation, etc, in assessing how they influenced your company’s growth. While difficult, we are focusing on how this changed in years one through five. We realize that this may have also changed after your SE’s first five years, and we would like to collect that data as well, but the main focus of this research is the early, formative years of your social start-up. 1. What year was your firm founded? 2. Who were the founders in the first year? 3. What type of organization were you when you were founded (for-profit, non-profit, hybrid)? 4. How many employees/interns were there in the first year (paid/unpaid) outside of the co-founders? How did this change each year in the first five years? 5. What was the source of your capital for funding in donations, grants or investment capital? How did this change in your first five years since founding? 6. Who were the original targeted customers and/or recipient of the company’s products or services when founded? How did this change by year three? Year five? 7. How much of your revenue was generated through your own activities (ie, sales of the products or services)? How did this change between year one and year five? 8. What role did product or service innovation (or business model innovation) play in those early years? 9. How has government policy helped or hurt you as you grew the business in the first five years? Have you received government assistance in the form of subsidies, tax breaks, or other measures? 10. What distribution channels proved to be especially important in those formative years for the company? 11. Can you explain how your business model evolved from the first year to the fifth year? How about now? 12. What partners were key to your success in the early years? 13. How was brand recognition important in the success of your business in those early years? For example, what role did media coverage, public relations or advertising play in your company’s early success? 14. As you know, we are writing an article on scaling the social enterprise. Are there any other factors that were important to your company’s success that we might have missed? Figure 1. Semi-structured interview questions.
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recognition and media attention in scaling. We closed by encouraging interviewees to elaborate on anything that we might have missed, and that had played a pivotal role in their growth (see questionnaire used as an interview guide, Figure 1). From these in-depth interviews with founders or founding teams, we inductively delineated seven categories that were persistent across the eight firms. Once interviews, notes and transcriptions were completed, seven important ‘categories’ or ‘factors’ emerged based on how frequently they were mentioned in each interview, and how much emphasis these topics were given within the interview. The final seven categories were: social innovation (product, service or business model), organizational structure (non-profit, for-profit or hybrid), financial capital (size and source of funds), media focus (the amount of media attention that the start-up received, and whether this attention had a positive or negative effect on its growth), strength of the supply chain (sourcing goods, production and distribution channels) and the SE’s human capital (the initial founders and their key staff). We also asked the founders about the role of government in either providing resources or potentially hindering the SE’s growth by blocking its ability to sell products due to regulations. We then went back and had three research assistants code each interview using the aforementioned categories, counting the number of references in each interview or interviews, across each category, using a comparative case analysis (Eisenhardt and Graebner, 2007), and ensuring high coding inter-reliability of over 90%. From this coding process, we created a ranking of the top three categories across all companies, based on the number of instances when these key words were mentioned within each interview. Ultimately, we preferred to give more weight to the rankings, rather than an absolute count across all interviews, as we did not want to skew results towards some codes simply because some interviews were longer than others. We found that the most important factors were: (1) an ability to garner financial capital, (2) success at building out the SE’s supply chain and distribution channels, and (3) ensuring an ongoing media presence, which was critical to increasing the SE’s visibility and credibility with investors, partners and, eventually, customers and/or beneficiaries (see Table 2). The top two of the three factors that led to scaling the SEs included: the SE’s success in raising enough financial capital to grow, and the ability to set up a supply chain, from suppliers to distribution channels. Having a strong media presence was recognized as an important and significant third factor. Media proved to be an important amplifier of the other key factors, helping the SE to secure funding and important
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Table 2. Counts of rankings across all social enterprises. Ranking Social innovation Type of organization Financial capital Media attention Supply chain Human capital Government
1st
2nd
1 2 2 1 2 0 0
0 1 2 3 2 0 0
3rd One + two 1 1 3 0 2 1 1
1 3 4 4 4 0 0
One–three 2 4 7 4 6 1 1
distribution channels through heightened visibility and increased credibility, thus creating a virtuous cycle for the fast-growing SEs. Media, in effect, created the perception that the start-ups were larger than they actually were, which provided these SEs with enhanced credibility in the marketplace. These three factors in turn allowed the firms to expand in other ways, such as adding new key employees, or having sufficient funds to improve their product or service offering continuously once it had received wider customer adoption. The fourth most frequently mentioned category was organizational structure, which was often tied to the founder’s perception of the SE’s role within society, as well as how the founder felt society would perceive the organization due to its hybrid, for-profit or non-profit status. While some of the founders did speak about their challenges with teams and hiring, they often characterized the founding teams as being scrappy – doing what they could with limited knowledge and experience. They also staffed their SE with numerous unpaid interns and volunteers in their early years. Once they had funding and customer traction, the founders could then begin hiring employees with greater levels of expertise in key functional positions. Both increased levels of financing and the need for a more sophisticated supply chain management were often the catalysts for step-ups in hiring more experienced individuals. While not always ideal, the founders felt that they needed to be ramping up their SE’s delivery of its product or service before an experienced, senior-level person would be of value. Additionally, they needed to have enough revenue traction and funding to attract a more experienced person away from a larger, more established firm. As mentioned earlier, these SEs all had high levels of social innovation in their firms, which in some cases centred on product innovation (Embrace, Sanergy, Back to the Roots, Revolution Foods and d.light) or service/ business model innovation (Kiva, Fair Trade USA, World of Good). However, much of the innovation was neither radical nor bleeding-edge, but instead consisted of twists on the familiar. Two cases in point, which came out of Stanford’s Institute of Design, are Embrace and d.light. Embrace created a baby warmer for prematurely born infants, which did not need a constant electrical energy
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source, as traditional incubators do. Instead, wax packets could be boiled in water and inserted into a sleeping baglike product. This product provided life-saving warmth for premature babies at a fraction of the price of traditional incubators. These infant warmers were not only more reliable than those requiring electricity to generate warmth, but they were easier to maintain in comparison to their high-end electrical counterparts. But they (intentionally) did not require the latest ‘parts’; nor was the product dependent on technicians in the field to service the product. Similarly, d.light offers lighting for consumer use that is low-cost, requires little maintenance, and is operated by solar power instead of electricity. Early on, one of d.light’s biggest challenges was ensuring that its product was bug-free, not in its operating system, as we often think of when referring to software products from Silicon Valley having bugs, but in actual insects that found their way into the light itself. Sanergy and Kiva also represent ‘twists’ on the familiar. Sanergy, which supplies affordable bathroom kiosks throughout Kenya, will eventually offer fertilizer made from its kiosk-housed human waste. People have turned waste into fertilizer before, but Sanergy has been innovative in integrating the business models for sanitation and fertilization within its product/service mix. It further partnered with Kiva to provide microfinancing for small businessmen who operated its toilets locally. Microfinancing was not new when Kiva entered the market, but Kiva uniquely democratized financing by providing funding opportunities to US-based consumers online, in a very approachable and relatable way. Revolution Foods offers healthier, more locally sourced and prepared school lunches than its larger competitor, Sodexo, and Fair Trade USA (FT USA) extended the fair trade concept to US consumers, even though the fair trade concept had existed earlier in Europe. Back to the Roots sees its social impact related to food education within urban environments, selling its easy-to-grow mushrooms in a box. There is nothing novel about growing mushrooms in compost (even if that compost is used coffee grounds), but the packaging, branding and selling of this product to consumers in retail stores such as Whole Foods, Costco and even Home Depot, created a new and novel product offering. In sum, each of these SEs sought to modify existing products/solutions, making them more appealing and appropriate for the markets that they chose to serve, but none of them aimed to create highly technical and complex products.
Financial capital The need for financial capital was consistently mentioned by all of the organizations in our sample. Each
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founder acknowledged the difficulty of obtaining financing to back his or her ventures from the outset. Having a financial backer signified much more for the SEs than the actual dollar amounts they obtained; garnering capital often served as a catalyst to increasing the organization’s credibility. In multiple cases, the first investor took a proverbial ‘leap of faith’ when backing the SEs. This then paved the way for follow-on investments. By obtaining a significant first investment ($100,000–500,000 seems to be a sweet spot), the founders of the SE could begin to focus on growing the SE full-time, including either quitting their jobs or turning down job offers received while they were still in school. Furthermore, there is a larger symbolic meaning behind obtaining these funds: raising funds helped these SEs gain credibility with suppliers, distributors, and ultimately their customers. Clearly, given our sample set, several of the SEs were recognized through the GSVC, but often this was only one of many competitions in which they participated. The SEs in our study successfully won traditional (nonsocial) business plan competitions such as the MIT 100K Challenge, Berkeley’s Bplan or Big Ideas competitions, and the Pan-Mass Challenge. Through competitions, founders were often giving presentations in front of angel investor panels, which served as competition judges. Angel investors were instrumental in the early success of SEs, as they provided not only monetary financing, but were thought to be partners as well, often serving as important advocates for the SE. But early sources of capital also included business plan or social venture competitions. Founders of World of Good (WOG) mentioned that through two business plan competitions, they were able to secure investments from individual investors, who served as judges. These also provided the company with opportunities for recruiting new advisers and gaining the attention of venture firms that might not fund WOG initially, but would provide it with capital down the road. These larger investment firms would then take board seats in the start-ups as well. Two SEs, WOG and d.light, also won $250,000 from a Draper Fisher Jurvetson (DFJ) competition, which is especially interesting, given that DFJ is a traditional venture capital firm with a bias towards backing mainstream tech start-ups. Obtaining a first key investor can also act as a signal of credibility to other potential investors, paving the way for additional funding and support from other important partners early on. In the case of d.light, Flextronics chairman Michael Marks was an ideal example of financial capital’s intangible effects. ‘Michael Marks said, “Yeah, you can have $50,000, but use my name,” and that was hugely valuable,’ Ned Tozun recounted. Marks’s association with the company allowed d.light to
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garner further support for its mission from funders, partners and distributors. Founders at Kiva felt similarly when it came to being selected as a Draper Richards Kaplan Fellow, noting that it was ‘… huge, because you know when a foundation of that reputation puts their name behind you, it unlocks all this follow-on capital,’ according to Premal Shah, President and co-founder of Kiva. As mentioned previously, the ability to raise substantial funding allowed these social entrepreneurs to dedicate themselves to the SE full-time, rather than attempting to manoeuvre their start-ups around other full-time obligations. Paul Rice, founder of FT USA, reiterates the importance of receiving an Ashoka Fellowship: ‘… the Ashoka Fellowship … sounds modest but they gave me $50,000 a year for three years. That was my salary in years three, four and five of the venture. More importantly, it gave me the credibility to be able to start winning other awards.’ The founders’ ability to earn early capital allowed them to devote themselves fully to their start-up, establish a preliminary team of employees, and fund necessary product development, which proved essential to get the SEs off the ground. Sanergy experienced the intangible influence of capital in multiple ways. Acumen Fund, which is well connected to East African governments, was instrumental in helping Sanergy gain the trust of the local governments within Kenya. While the amount of funding Acumen gave Sanergy was important, it would have been significantly more difficult for the company to achieve the level of social impact that it has today without Acumen opening doors for the founders in Kenya. Also, despite not winning numerous business competitions, Kiva’s founders felt that their participation in competitions was highly valuable as it ‘provided critical feedback and forced us to get our story together’. For Paul Rice of FT USA and his team, the process of trying to secure a loan from the Ford Foundation required them to prepare extensive financial projections, ‘I got a lot out of it. My team got a lot out of really having to challenge our assumptions about what would drive growth over time and what categories might be of interest to capitalism.’
In some cases, invested capital could lead directly to establishing distribution channels. Jerry Gallagher, a partner with Oak Investment Partners, who also sat on the Revolution Foods board of directors, introduced the Revolution Foods founders to Whole Foods. Whole Foods, in turn, connected them to Stoney Hill Farms. Stoney Hill Farms liked Revolution Foods’ mission, and extended the wholesale pricing that they granted to
Whole Foods, to Revolution Foods. This was crucial to lowering the cost of Revolution Foods’ lunches, allowing them to preserve cash in the early years. In several cases, Whole Foods went beyond the traditional buyer role, mentoring young SEs in how to improve their product offerings. Whole Foods was not only WOG’s first important customer; Whole Foods’ buyer also helped the firm with better sourcing of its craft goods. Whole Foods similarly advised the founders of Back to the Roots on how best to commercialize their product into the sleek ‘mushroom in a box’ design that exists today. With Fair Trade, Whole Foods became a partner later on: ‘Right now, they are driving a lot of our growth and innovation … we launched 20 new products with Whole Foods in the last two years that no one else is doing stuff like coconut water and peaches and watermelons and asparagus,’ describes Paul Rice, CEO of FT USA. Another key lesson learnt regarding distribution channels is that getting your product to a large distributor is not enough. Each SE had to create direct connections to its potential customers, often by building its own sales force. This was especially true in the early years, before the product or service gained fame or credibility. Frequently, even if large distribution channels were secured, the SE’s product was unlikely to be taken seriously by the distributor’s sales persons, because the product was still unproven. Both Embrace and d.light made the mistake of relying too heavily on large distribution partners in the early years. They ultimately found that they had to staff their own complementary sales force to join the distributor’s sales team on important customer calls, as part of ongoing training efforts. They also had to understand the firm’s pricing and commission structures more astutely so that the distributor’s sales team was properly incentivized to sell their products, too. For example, General Electric (GE) was not only an important strategic partner for Embrace, but was a very large distribution channel. However, Embrace’s product sold for a fraction of the cost of GE’s own incubator. GE’s sales team simply was not incentivized to sell Embrace’s product without sales quota and commission adjustments, even though Embrace’s product was more cost-effective and more reliable in the field due to its ability to perform without constant power. Embrace had also originally hoped that the product would be distributed through government health centres and non-government organizations (such as the Red Cross and others), which was its motivation for initially structuring its organization as a non-profit. In reality, Embrace’s founders discovered that, for the most part, physicians and medical groups were highly risk-averse. They insisted that Embrace should go through expensive and arduous clinical trials before they would distribute
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Successful supply chains
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the less expensive, but ultimately equally effective, infant baby warmers. Embrace’s founders had originally thought that they could partner with the Indian government to distribute their products to government hospitals. But instead, Embrace found that local champions within each state mattered much more than endorsements by larger government entities. Jane Chen, co-founder of Embrace, sums up their learning in the following quote: ‘Government is a good long-term strategy, but not a good immediate commercialization strategy’. Also key to expansion was securing the first important customer channel. Once one major customer agreed to distribute the start-up’s product, then the SE could much more quickly secure another similar distributor. This was true for Back to the Roots, which found that once it had secured Whole Foods, other retailers were more willing to sign on as they felt there was ‘safety in numbers’. The same was true with state governments for Embrace; once one state had signed up, others followed. As the SEs scaled, they also often upgraded their distribution channels. For d.light, the development of its distribution partnerships has been progressive, and currently looks very different from its initial ones. Ned Tozun states: ‘the partners we work with now, they would have never worked with us when we were small’. Ned is referring to the fact that after the company scaled, it was able to attract larger, more credible distributors with greater customer reach. In addition to having sales teams for a ‘market push’, it was important to create a ‘market pull’ for the SE’s products. In FT USA’s early years, students on the University of California Los Angeles (UCLA) campus put a lot of pressure on campus administration to have their dining centres serve Fair Trade Certified coffee. Paul Rice explains that, ‘Both the Villanova kids and the UCLA kids got really excited about Fair Trade … that led Sara Lee to give me a call and say, “Okay, we’re ready to sign”’.
Becoming a media darling For all of the SEs in our study, becoming a ‘media darling’ was very important to their ability to scale. The most consistent benefit of having media attention was that it allowed them to be seen in the marketplace as bigger than they actually were. It provided, in effect, instant credibility. It also provided different benefits across the SEs in our study. For Sanergy, the media attention helped it attract investors. The same is true of Kiva; Premal Shah, early employee of Kiva, reiterates this point: ‘It was actually PBS Frontline, as that whole program was funded by the Skoll Foundation. We weren’t a grantee yet, and Skoll wanted to do more story
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telling for good. So you could argue that more than the grant that they gave us, the one million dollars, was the insanely catalytic media coverage.’ Back to the Roots (BTTR) experienced significant media coverage, which increased the visibility and recognition of its start-up, and was very helpful in securing distributors. BTTR received early media coverage from the Wall Street Journal, the Daily Cal (UC Berkeley’s student paper) and Fast Company. Rachel Roy also featured BTTR’s products on her show, as did Martha Stewart. CBS Evening News, PBS Kids and the Today Show also covered BTTR. The founders went on to give two Technology, Entertainment, Design (TED) talks, and one founder was even featured on the reality show, The Bachelorette. For Kiva and FT USA, each benefited from being able to piggyback on bigger issues in the media. FT USA was sought out as a ‘solution’ to the coffee crisis covered in the news. This ultimately led to greater press for FT USA’s corporate customers; according to Paul Rice, ‘We quickly realized that if we could get ourselves into the press, we could get our partners in the press … which is big time’. Similarly, once Muhammad Yunus won the Noble Peace Prize for his work in microfinance, the media began looking for case examples of US-based companies that were doing microfinance. Kiva became the US counterpart of Yunus’s work in Bangladesh. Ultimately, though, Kiva credits its appearance on The Oprah Winfrey Show as the big turning point. The number of people who tried to give loans on Kiva’s website after the show actually caused the system to ‘crash’; it lacked the server capacity to handle the sudden spike in visitors who wanted to fund loans through Kiva’s website. However, as the SEs matured, media attention became less important. According to Ned Tozun, founder of d.light, founding teams of the SEs ultimately need to shift from promotional activities, such as being on panels and being covered by the press, to focusing instead on operations and the ‘need to do the work’. While media remains important, three years after BTTR’s founding, the founders are now focusing more on social media, hoping that grass-roots marketing will increase the market pull for their products, just as the college students did for FT USA years ago.
Importance of organizational structure While not one our top three factors, ‘organizational structure’ is still worthy of mention. Given that we had representation across all organizational types in our sample (as shown in Table 1 – for-profits, non-profits and hybrids), there appears to be no one ‘right’ answer on which corporate form allowed SEs to scale fastest.
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Instead, it is just a matter of what worked for each organization, depending on their social mission and funding sources. One participant, Embrace, actually modified its organizational form by adding a for-profit arm down the road, when it became clear that venture capitalists were better investors in long-term product development than donors were. Some founders felt very strongly about their corporate form. Kiva, for example, felt that its non-profit status led to more favourable terms from partners such as PayPal, which offered Kiva free payment processing. It also helped them attract a large number of voluntary Kiva Fellows each year, who serve as Kiva’s eyes and ears around the world, working with its microfinance partners. But Premal Shah of Kiva also emphasized, ‘… maybe there is some sense that earning money off of the poor lacks taste or lacks humanity’. In contrast, d.light was advised early on to incorporate as a for-profit firm, and strongly believes that it was the right decision. Based on the extent of its international operations, d.light has subsidiaries in the Cayman Islands, China, Kenya, Nigeria and India. Similarly, Revolution Foods incorporated as a for-profit firm, but as a nod to its social mission, it is also a B Lab-certified corporation. Kirsten Tobey, co-founder of Revolution Foods, emphasized how important its for-profit status was in being able to raise large amounts of capital from both social and traditional venture capitalists. BTTR is also a forprofit firm that is B Lab-certified. Three of the SEs in our sample are hybrids. Embrace was originally a non-profit. The founders thought that NGOs and hospitals would put a higher value on its nonprofit status. Instead, fundraising was very time-consuming, and donors often did not understand the amount of capital needed to fund product development and clinical trials. In contrast, venture capital investors were used to funding lengthy product development. Now, Embrace has both non-profit and for-profit entities. The non-profit entity, Embrace, distributes low-cost infant warmers to Third-World populations most in need. The for-profit entity, Embrace Innovations, has received venture capital and is using these funds to build a distribution channel that sells the infant warmers for a profit. Sanergy and WOG were set up as hybrid structures from the beginning. The late Priya Haji, co-founder of WOG, was adamant that both its non-profit and forprofit organizations were very important to fulfilling WOG’s social mission. The for-profit arm, WOG, accepted ‘growth capital’ from both traditional and social investors in order for WOG to scale. The nonprofit World of Good Development Organization (WGDO) set the fair wage price guidelines that were pioneered by WOG, but were also open to anyone who sourced goods from the Third World. Lastly, Sanergy
distributes it toilets through its non-profit entity, but plans to sell fertilizer through its for-profit entity.
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Human capital Across all eight social enterprises researched, human capital was discussed frequently, despite its absence from our top three list. Human capital therefore deserves acknowledgment. Echoing our literature review, discussions around human capital highlighted the importance of having the ‘right team for the right time’. They often had difficulties retaining a leadership team that reflected both the drive and passion of the SE’s social mission, while also possessing the necessary skills and experience to implement the goals and strategies of the organization. While doing ‘whatever it takes’ is sometimes necessary in the beginning, this ‘scrappiness’ is most valuable when the SE is very young. As the SEs moved beyond the gestation period and into periods of scaling, established skill sets and the teams’ credibility became increasingly important, which often led to a ‘trading-up’ of the leadership teams over time. Some organizations lamented their mistake of having too little expertise early on, while others felt they had focused too much on the skill set of their early team, losing some of the passion and energy that new, young entrepreneurs can bring to a business. Founders of Embrace discussed a valuable mistake they had made recruiting a large and inexperienced team of interns. Given the nature of their product and the delicacy of the population they sought to help, more medical knowledge surrounding the product would have accelerated product acceptance within the medical community. ‘Twenty-five young people’ who did not have any credibility or familiarity with the clinical studies was not an ideal scenario for convincing potential customers, such as doctors, that the product was more energy-efficient, safer and equally effective for premature babies. D.light founder Ned Tozun expressed similar concerns, but also noted that experience was not the only critical factor to growth: ‘There’s a lot of people who are successful early on who can’t really scale with the organization. I think we probably underestimated the value of bringing on experience, but it’s not just actually getting someone with deep experience. You have to get someone who’s the right culture fit, who’s aligned, and actually who’s still really flexible to want to learn.’ The key is being able to evolve the leadership team with the changing phases of the organization as it scales and adds new members, and addressing new markets. In addition to getting the expertise and cultural fit
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right, many founders noted the value of maintaining a wide set of skills within the founding team. For example, WOG founders, Priya Haji (Priya) and Siddharth Sanghvi (Siddharth), had complementary roles in the company. Priya had extensive experience in social entrepreneurship; she had co-founded several nonprofits prior to founding WOG, and was already recognized by a number of media outlets as an influential social entrepreneur. Siddarth’s consulting, technology and marketing experience gave him a strong foundation to handle all aspects of WOG’s operations, and complemented Priya’s vision and charisma. Siddarth described how Priya would often get stressed about fundraising or securing large retailers, whereas his computer system crashing would cause his stress level to peak. Revolution Foods co-founders struck a similar harmony within their organization from the start. Kristin Groos Richmond gravitated towards handling the external aspects of the enterprise, such as developing new markets and strengthening Revolution Foods’ presence in the media. Kirsten Tobey, on the other hand, preferred building the internal operations of the company. This combination gave the founders the ability to span the wide range of roles that needed to be filled by a very few people in Revolution Foods’ early days.
Role of government Government did not play a major role in either helping or hindering the SEs in our sample. Governments would generally not pay much attention to younger organizations, only taking note once scale was achieved (for example, Sanergy, d.light). Government agencies were important when our SEs sought compliance, however. For example, Revolution Foods was sure to bill its school lunches such that the charter schools could obtain federal funding reimbursements for low-income students. For SEs operating in developing countries, navigating regulations and governmental policies required additional effort. ‘We have been working slowly with them [the Kenyan government] … but there is quite a bit of bureaucracy and red tape, as well as uncertainty when they switched from a UK to a US governmental approach,’ states David Auerbach, cofounder of Sanergy. Jane Chen of Embrace adds, ‘Approaching early government contacts resulted in a lost year. But the government is important, as reaching rural populations is very tied to government support. In India this is complex, as there are 11 state governments. Now Embrace is finally getting traction.’ In very rare cases, the government can be a funder as well. BTTR received national stimulus funding, which was important early on. Sanergy was also a recipient of USAID funding. However, government agencies generally fell
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short in recognizing and supporting SEs when they were young.
Role of universities As we discuss the various factors that have helped these SEs to succeed and scale from their genesis to where they are today, we have been gratified to see the role that universities can play. Universities are important curators of networks, including members of the press, angel investors, lawyers and later-stage investors as well. They also provide an ideal setting to start a business, given that the founders, as students, often have flexible schedules and limited outside commitments, be they personal or professional. The founders in our interviews noted that as students, they were able to take the time they needed to think about a new way of doing things, as well as recruit diverse teams made up of their business school colleagues and technically skilled cofounders studying in other parts of their universities. As Ned Tozun from d.light reflected: ‘One co-founder had engineering and a startup background. I kind of knew about how that world worked. We’re both passionate about doing something that would have a social impact. That’s actually why I went to business school. I wanted to figure out how to do entrepreneurship, especially in technology, and how that really blended with impact, especially in developing countries.’ However, what was often lacking in the university setting – which is consistent with our literature review as well – was mentorship from those in the social sector. There also appear to be fewer incubators that accept and nurture socially motivated businesses. Universities can do a much better job of connecting students with entrepreneurs and providing them with a safe place to incubate and launch their businesses.
Future research The factors most attributed to the scaling of the eight notable social enterprises we studied were: raising financial capital, getting their supply chain right, and ensuring ongoing media coverage. By focusing on these three factors simultaneously, SEs in our sample were able to create a virtuous cycle. Participating in business plan competitions very early on also played an important role in putting these social entrepreneurs in front of potential investors. Winning these competitions further boosted a social start-up’s credibility, and was often catalytic to securing larger investors. The importance of media, helping these companies seem larger and more
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established than they were, is a new finding of our research. Employing effective media strategies was key in helping these social start-ups secure important suppliers and distributors, which was very important to the SE’s ability to scale. SEs were more likely to secure better terms from suppliers, and better traction from distributors, if the start-ups were receiving media traction. The importance of establishing an effective supply chain is also a new finding of this research. Obtaining great terms from suppliers, being able to deliver quality products due to having predictable manufacturing, and having well functioning distribution channels were all key to the success of the social startups in our sample. So media was important on many levels: it helped secure suppliers, distributors and investors; investors were also more likely to fund SEs that received notable press coverage. We recognize that a limitation of our research is that our findings lean more towards in-depth analysis rather than quantitative, statistically rigorous analysis. A larger-scale quantitative research study that tests the factors most associated with early firm success across hundreds of SEs would add much to the field. Given that all of the firms in our study are still in operation, further qualitative research following them as they grow past year five might shed light on the additional factors that enabled these firms to continue their expansion. A further limitation of our research is that we did not query those teams that disbanded or start-ups that failed; it was difficult to locate these entrants since some of the teams had been disbanded for some time. We also found that those that had failed declined our interview requests. Finally, while this research did look at the GSVC’s entrants that had not only secondary, but also primary offices outside the USA, we have noted that most of these firms had their genesis within the USA. We did query the GSVC’s international partners to ensure that large-scale SEs were not missed. But perhaps other non-US-based competitions lean more towards non-US-founded SEs. Beyond our findings on the importance of media channels, supply chains and funding sources, we also learned that there was an important need that was currently not being met: providing SEs with greater mentorship and social start-ups with a place to incubate. Founders of social start-ups need time to home in on a business model/product mix that will allow them to scale. Having a place to incubate and mentors to advise them along the way was crucial to the one SE in our study that had incubation space. Finally, it is important to mention that all of the founders that we interviewed consistently had a mindset to scale from the very start; they never planned to remain small. It was not a matter of if they would scale, but rather of when they would
scale. This determination clearly comes from within, but we can do more to support the ambition by developing and making accessible our rich networks and by providing them with the physical space in which to operate, such that the next generation’s social entrepreneurs can indeed ‘change the world’.
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Acknowledgments We would like to thank the many graduate student researchers who helped us with this project, including Molly Bode, Tammy Guo, Meredith Hursch, Leigh Madeira and Julia Silbergeld. We would also like to thank the inspirational social entrepreneurs who participated in our research. They shared valuable time with us and also provided timely responses to our follow-up questions.
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